Another Italian bank is in focus for the ECB

  • The Genoa-based bank Banca Carige said on Sunday that the ECB has requested to see how the bank will meet minimum capital thresholds amid an ongoing management crisis.
  • Goldman Sachs said European banks could see a “modest year-on-year decline” in revenues of about 4 percent.
A pedestrian passes a Banca Carige SpA bank branch in Rome, Italy.
Alessia Pierdomenico | Bloomberg | Getty Images
A pedestrian passes a Banca Carige SpA bank branch in Rome, Italy.

After months of speculation over the health of Italy’s banking sector, another Italian lender is in the spotlight after the European Central Bank (ECB) demanded Banca Carige to see new capital plans as it tries to overcome a management crisis.

The Genoa-based bank Banca Carige said on Sunday that the ECB has requested to see how the bank will meet minimum capital thresholds amid an ongoing management crisis. The ECB has also said that such capital plans can be submitted later, if the lender decides to merge with another institution. Banca Carige has lost its chairman and deputy chairman in recent weeks, alongside two board members, over disagreements with the bank’s chief executive.

This crisis adds up to the pile of problems in the Italian banking system, where crisis-legacy issues remain, with one of the biggest problems being a build-up of non-performing loans.

Veneto Banca, Banca Popolare di Vicenza and Monte dei Paschi have all made headlines in the last year for requiring help from the Italian government to avoid a wider collapse. The former two received a cash buffer of 4.8 billion euros ($5.63 billion) and state guarantees of 12 billion euros ($14.08 billion); whereas the latter received a cash injection of up to 6.6 billion euros ($7.4 billion).

Analysts argue that the several attempts to rescue Italian banks show that the mechanisms used to prop-up banking institutions, like those in Italy, are not sufficient – and could ultimately put the entire European system at risk.

“That speaks to how robust the mechanism in the EU is, because you can only make so many exceptions before you start questioning the whole bail in-bail out system,” Luca Raffellini, head of business and financial services at Frost & Sullivan, told CNBC Monday.

He also said that the best way to reduce the level of bad loans in Italy now seems to be through the “decent market for securitization” — which allows the merger of several kinds of debt, for instance debt related to mortgages and credit card loans, and sell them together to investors.

However, Raffellini warned on “Squawk Box Europe" that this might not take place depending on what the Italian government, which came into power in June, decides to do.

No profitability means weak earnings

The various legacy issues, such as bad loans, are not solely an Italian problem. Across Europe, banks have had to work on their structural problems. However, there is one clear area that still demands action – profitability.

“The problem for European banks is profitability and the difficulty for a lot of them is with interest rates where they are, it is still a challenge for them to get profitability back up,” Daragh Quinn, senior Vice President of European banks equity research at Keefe, Bruyette & Woods, told CNBC.

Central banks have lowered interest rates in the wake of the sovereign debt crisis to boost lending and ultimately the economy. Though they are now slightly increasing those rates, the prospects are that they will do so gradually, meaning that the prolonged period of low rates will remain for some time. As a result, banks won’t be able to charge significantly much more for their loans, dampening their profits.

Furthermore, there are also new political and economic concerns that could hit European banks.

“If you go back earlier in the year, expectation for rates for 2019, for 2020 were materially better,” Quinn told CNBC on Monday.

“The outlook maybe in terms of trade and European economy was a bit stronger, maybe there was less political uncertainty around Italy…Looking to 2019, the ECB itself has pushed back those rate expectations,” Quinn outlined as factors that could keep interest rates low for some time.

“Until there’s better visibility on that outlook earnings expectations for the banks are going to struggle,” he said.

Amid the start of a new earnings season for European banks Tuesday, Goldman Sachs said in a note that this will be “a muted quarter with European banks underperforming US peers.”

According to Goldman Sachs, European banks could see a “modest year-on-year decline” in revenues of about 4 percent. In comparison, year-on-year revenues are expected to jump 9 percent in the U.S.